I guess, in some ways, but that's exactly what led to SVB's collapse. It's only safer in a declining or flat interest rate environment or when you use short duration treasuries. Otherwise, this exact strategy leaves you vulnerable to a bank run. See above. This specific strategy requires active risk management.

> I believe that fractional reserve banking based on fiat currency is inherently risky. However the state does not make it easy for me to avoid this. However it is possible for even the moderately wealthy person to take safe action to reduce such risk.

It's not really, fractional reserve is where money comes from. Money is created when debt is issued and it is destroyed as the debts are repaid. This is how interest rates control the money supply. As interest rates go up, repayments remain constant and originations drop, so the supply goes down. The M2 supply has shrunk about a trillion dollars over the last 8 months, and this is why.

It's weird to me how few people this seems intuitive for, and I only learned about it over the last few years.

The risk is basically zero for anyone under the FDIC limit, which is, substantially everyone. The average American can't rustle up $500 for an emergency expense, never mind $250K in un-invested cash. If you have more than $250-500K but less than $5.5M you can use a sweep account. If you have more than that, you can pay for private insurance.

> However it is possible for even the moderately wealthy person to take safe action to reduce such risk.

What do you mean exactly.

I understand money is created with issued debt, since the interests do not exist yet.

I don't understand why do you say money is destroyed when interest are repaid? If the bank now holds that money, why do you say it is destroyed?

The concept of fractional reserve lending just means that banks are allowed to issue new money to make loans.

But the concept isn't really accurate anymore anyways, banks aren't limited in how much money they can create based on a percentage of their asset portfolio but instead based on complex loan qualification rules.

the opposite happens when you buy a government security or a corporate bond, except you had to get that cash from someone else, not create it on your own.

it gets really weird when you borrow money to buy more money.

Corporate debt is basically exactly what you described... and I assume by 'government security' you mean debt, in which case I have more bad news for you. It's all based on faith in the legal system to enforce debt obligations.

The system itself is actually quite elegant and has functioned very well over decades and a wide variety of market conditions.

Remember despite new money being created now in loan issuance the aggregate supply is shrinking so it's silly to look solely at issuances and say they're 'out of thin air' when the system is actually reducing the supply. Look at the whole thing, not one slice.

Basel III utilizes complex risk formulas tied to specific asset classes for the basis of qualification and capital-based reserves which include stock market exposure (capitalization) counted as part of supplying part of their reserves.

Also, long-term issued debt (bonds) value reporting becomes fixed if they elect to hold them to maturity, with no further reporting needed (at least as far as I've been informed). This was one of the findings from Signature and a number of other banks.

The closest financial structure that describes the banking system is a government granted Ponzi scheme that's limited by rules set by unelected private institutions (Fed/FOMC).

Bubble pressures eventually cause an economic calculation problem which manifests in shortages.

fourier, fundamentally the quoted statement is wrong except in a very narrow niche. Its a overgeneralization that ignores core principles.

There's no real way to clarify this in the span of a single post, there's a lot of fundamental material you need to be aware of.

I'd instead refer you to a very solid book by David Graeber called Debt, The first 5,000 years; and then The Wealth of Nations & The Wealth and Poverty of Nations, for a more broad economic understanding (when things actually worked).

Following those two, Bridgewater's Report (Ray Dalio) Big Debt Crises will give you sufficient background to understand what they are talking about and realize its just a narrow niche that ignores the forest for the trees. There are people that believe you can borrow from the future indefinitely with debt, and the price never comes due; Modern Monetary Theory is one such dogmatic approach and it ignores important distinctions about who decides what in trade.

That niche being money and banking [1]. The comment you dismiss is correct: “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

To argue that enabling a deposit taking bank that forwards all deposits to short term treasuries should be illegal, is absurd beyond comprehension. Yet that is the situation we live in.

Personally I think individuals should just be able to open an account at the Fed.

Anyone saying something like that clearly has absolutely no clue or concept what the counter-party risks of doing so are nor how bureaucracies actually work in practice. Just promoting that kind of narrative is fundamentally deceitful because its outcomes pose such harm to not only yourself but everyone else you've enrolled in the process.

You'd wake up one day and not be able to get your money. The account would be frozen, they'd refer you to some other department, who would then point back to the first department in a circle. No escalation route, 8 hours getting through to 1 department, another few days, your back in a loop no resolution. In the meantime funds are still going into your account but they can't be removed.

You'd say that will never happen, but this type of finger pointing happens all the time in business and bureaucracies alike. There is a fundamental lowest common denominator, and in a state funded systems that denominator is ultimately negative production value. Business can't afford it, but government gets paid by the money printer (stealing value from those holding the currency over time).

That's not even going into what they'll use your banking information for? We see you deposited and withdrew cash in 200+ dollar amounts multiple times over the span of a year. This is structuring, in addition to your reported income you owe taxes on the undeclared amounts and this has been referred to department X for further investigation, they make a finding and take your money first, wait time for their due process before returning (if you can prove its yours) or just keeping the money (in the case of non-responsive/lost mail). Civil Asset Forfeiture 2.0. Nevermind you do group grocery shopping on behalf of someone else (elderly who can't drive), or other plausible explanations, you are guilty until innocent because they have your money and you lack the power to stop them.

A public institution has to at least actually care about their public image or risk getting voted out, protested or picketed if it annoys sufficient amount of people, or sufficiently powerful people, in a democracy. A private one would just declare insolvency, restructure and rename, while still keeping the profits it achieved by "negative" bureaucratic actions.

Government can.

The bar for proving intent is very high. Its why most defamation suits fail.

> A public institution has to...

No, they don't have to do anything. Look at California. Specifically EDD and FTB. There are plenty of horror stories you can Google.

lol, yep, just waiting for my check from Soros.

What you're describing has literally never happened in over 100 years of banking in the US and there's no indication that it'll start other than a fringe fanatical movement towards shiny pebbles backing the money.

Converting a fractional to a non-fractional reserve banking system. They set reserve requirements to 0% in 2020 and adopted Basel III which itself is fundamentally flawed counting market capitalization exposure as capital reserves in lieu of deposit reserves with asset valuations based upon varying weighted complex formulas with less reporting, also comingling potentially third-party issued debt as a reserve asset paving the way for Ponzi.

Sure sounds as sensational as climate change and ice shelf's the size of Rhode Island breaking off. Except, its not a movie and this actually happened, were you paying attention and noticed or is this news to you? Check out the FDIC website.

The more that politics disconnects from working 'for the people', the more examples will come to the fore of logical solutions such as TNB being rejected or outlawed or regulated into an inability to function because the very fact that they're logical solutions means that they're working against political agendas that are incompatible with 'the reality on the ground'.

Uh... what's perplexing about the fact that the government wants banks to offer loans?

Barely anyone is qualified to assess the quality of a bank. It's difficult even for auditors. It shouldn't be your uncle's responsibility, it should be the responsibility of regulators.

That's really nothing to do with fractional reserve and more of an assessment of the US banking system.

If something is difficult to understand, even for so-called “experts”, that is a sign of severe dysfunction. All topics can be distilled into simplistic understanding. Once you speak in academic gobble-dee-gook you are done for.

Yes, my guy, I happen to believe that people who know what they're talking about should be listened to. I suspect you won't find this controversial. The world is far too complex for anyone to be sufficiently competent in every field.

> All topics can be distilled into simplistic understanding.

Simply false.

> Once you speak in academic gobble-dee-gook you are done for.

lol.

This would be a good candidate for a Reddit-like 'flair' concept so I wouldn't waste my time responding to someone who doesn't believe in the concept of people who know what they're talking about.

Also, the executives from those banks received compensation packages and structured equity sales prior to the banks failing. They did make out like bandits, and congress was looking at options to claw it back, but nothing was ever finalized.

Retirement funds which were invested heavily in index weighted stocks took the biggest hit net worth wise.

This is nonsense. Reserve requirements were deprecated in favour of finer-grained capital and liquidity requirements [1]. They serve the same purpose, but with a broader consideration than reserve requirements’ “is it a reserve” binary test. Banks’ ability to create money is still constrained by their capital requirements. We are on a fractional reserve system.

[1] https://www.federalreserve.gov/monetarypolicy/0693lead.pdf 1993

Those asset classes are heavily collateralized. If you want to get technical, what really happens when you convert the same underlying asset to be collaterilized multiple times and aggregate it in a single security or several steps removed so no one is the wiser?

Are you referring to SLR? In America, this is a second test [1].

[1] https://www.newyorkfed.org/medialibrary/media/banking/intern...

Most of the requirements are only applied to G-Sibs, which are only classified as such if they hold over 200 or 250B in assets (off the top of my head).

If you were paying attention to what happened with FRC, that was a trial run of things to come. There's an option's mechanism to cause the market maker to create synthetic shares. In volatility spikes they have two options to recoup losses, write/sell options and receive preferential treatment for clearing in receivership, or purchase shares. The latter in the face of significant shorting in addition to gamma squeeze causes a short squeeze (Gamestop), the former causes aggregate indebtness violations forcing delisting within 30-60 days which aren't usually announced (FRC).

Market mechanics say when there are more sellers than buyers the price goes down. If you can indirectly trigger more shares than are in existence being sold, the market can be tanked at a profit with sufficiently obfuscated capital.

Anytime you have over a 100% leverage ratio, its no longer fractional. Given the complexity of collateralization and the lack of any single clearing house for collateralized debt. You have no way of proving that the underlying capital reserve won't suddenly vanish in a contagion crisis. At any time there are tens of thousands of floating contracts that influence the market capitalization/stock price.

All banks are subject to capital requirements. Large banks have extra testing; that doesn’t mean “most” capital requirements are waived for small banks.

> an option's mechanism to cause the market maker to create synthetic shares

Former options market maker. All market makers can do this, it’s called naked shorting, and it has little to nothing to do with capital requirements in general.

> you have no way of proving that the underlying capital reserve won't suddenly vanish in a contagion crisis

Capital isn’t cash in a vault. It’s risk-weighted assets minus liabilities. Public equities are heavily weighted; that disincentivises using them significantly for capital. The only proof one needs that capital won’t vanish is the Fed’s discount window.

> Anytime you have over a 100% leverage ratio, its no longer fractional

This is the definition of fractional reserve. 10% reserve requirement means 9 parts debt to 1 part reserves, a 900% debt ratio.

We'll have to disagree. The moment the framework allowed market exposure in lieu of a capital reserve (in whole or part) it became inseparably linked as it impacts the basis of the capital reserve asset potentially misclassifying the asset as reserve instead of debt.

> This is the definition of fractional reserve.

It is the definition so long as all debt and reserve are segmented correctly into debt and reserve. The moment you have obfuscation such as multiple separate levels of collateralization or leverage being misclassified as assets; this definition fails, and the only time you'd find out about it given current frameworks is in a deleveraging (after the money is suddenly gone).

You have the same exact characteristics in a ponzi scheme.

Assets minus liabilities. What alternative valuation do you want for assets other than market value? (And again, in a crisis, the Fed’s discount window.)

> it impacts the basis of the capital reserve asset potentially misclassifying the asset as reserve instead of debt

This is double-entry accounting. Your bank deposit is your asset and the bank’s debt. A central bank reserve is a commercial bank’s asset and the central bank’s debt.

> as all debt and reserve are segmented correctly into debt and reserve

Again, this isn’t even on the level of finance or economics. It’s a fundamental misunderstanding of accounting. Reserves aren’t the same as capital, and both are assets and liabilities of someone’s. This is what fractional-reserve banking is all about. You’re basically upset there isn’t gold backing the central bank’s reserves, though even then, you’d be upset about the market price of gold varying with respect to other assets.

Regarding your Assets minus liabilities that's not strictly true. Its my understanding that bond assets are considered statically valued and not at market value when they have elected to hold it to maturity, I'm sure those aren't the only asset classes with alternate valuations/reporting.

See my edit in my last post addressing double-entry accounting, and how its not relevant to the discussion since the fraud and counterparty risk I'm talking about occurs outside the boundaries of double-entry accounting.

You seem to have mistaken the context.

Issued debt is not counted as reserve, its considered leverage and a liability, as a result you cannot issue more debt to increase your reserve. The ratio of reserve to issued debt must be below or equal to the set rate.

When you count debt as reserve unintentionally you have exponential debt being issued exceeding the ratio which ultimately collapses in the form of a Ponzi as environment and conditions change. Any ponzi eventually has a deleveraging, this often occurs when clearing any company whose assets have been collateralized potentially multiple times. The payout has already been made at origination, the value of the loan asset with backed secured collateral suddenly becomes 1/X depending on the number of X times it was loaned against; in reality it always was but the bankers didn't know it. The same asset is claimed in its entirety among X number of loan originators in clearing bankruptcy/receivership.

At the individual level people who invest in a Ponzi take losses. Risk of investing.

At the primary bank level, this is a systemic risk, bailout provided by FDIC/Fed is unwound as all aggregate fraud is unwound over time as inflation for troubled assets. Creating these plausible unforeseeable situations is incentivized.

It creates perverse incentives which is why bailout has been a recurring issue at least once every decade since the 70s. Concentrated banking means so big it will certainly fail.

When that inevitably happens, everyone holding USD or working for USD pays without their consent or knowledge via inflation. That is upsetting especially when it is easily foreseeable.

I'm not upset that it isn't gold backed. I simply do not believe it is a good idea to enable foreseeable fraud that will go undetected until its too late and encourage it to keep happening.

The risk by far outweighs any potential benefit. I'm all to aware what happens when hyper-inflation occurs. Ray Dalio wrote some nice case studies on those if you haven't already reviewed ("Bridegwater/Ray Dalio - Big Debt Crises").

In my opinion, most modern finance and economics training which I've seen is absolute garbage and encourages you to look at everything in isolation, or a very narrow context without providing fundamentals or limitations of the models they encourage. I've studied them, they just aren't very useful.

How can both parties be right while being completely wrong pretty much sums up isolation in complex interconnected systems. Many of the basic assumptions that are held true fail under some pretty simple situations involving corruption, control, coercion, and deceit.

If you can find vintage books on the subject they are much better and absolute gold mines (circa 1950s-1967) in comparison.

Under Basel III, no. They’re marked to market. Under American rules, yes, because the banking rules bone-headedly referenced GAAP. This is the HTM problem and it’s real, though far from fundamental with respect to fractional reserve banking. (It’s also solved in no way by a reserve requirement.)

> When you count debt as reserve

This is why we deprecated the reserve requirement. The Fed funds market is lent and borrowed reserves. A reserve requirement just counts liquid reserves; it doesn’t care if they’re owned or borrowed. A capital requirement takes into account if it’s borrowed. You’re arguing against the solution to the problem you pose.

> same asset is claimed in its entirety among X number of loan originators in clearing bankruptcy/receivership

Again, solved by capital requirements. Assets pledged as collateral net to zero. (A balance sheet should do this, but financial institution balance sheets are unintuitive.)

> If you can find vintage books on the subject they are much better and absolute gold mines (circa 1950s-1967) in comparison

Go to the true vintage: Bagehot and others who wrote from the height of the gold standard in the 19th century. Most English literature from post-War on the topic is fringe by that point.

I will, and thank you for the suggestion. I'm always on the lookout for books/essays/authors I haven't read. I'll add it to my reading list.

It seems often the further I go back the more applicable and less byzantine discussed subjects are.

I've gotten more out of books from 50-100 years ago then college textbooks ever provided for subjects that were around back then.

The reasoning here is contentious but straightforward. Narrow banking is safer banks cannot over-leverage themselves in the same way and cause a financial crisis. This means the existence of a narrow bank will very quickly kill fractional reserve banking; why would you as an individual take the extra risk?

Why might that be a problem? Proponents of fractional reserve banking say that the higher volume of loans it enables collectively allows society to take larger risks that result in higher quality of life over time. Without that volume of loans you'd see less housing being built, less small business loans, etc. The argument goes that the crashes are worthwhile for the overall effect on the economy.

Whether fractional reserve banking is a net good over narrow banking is up to debate but the game theory behind why they cannot coexist is hard to argue with. Individuals will overwhelmingly take the choice of "less risk" and switch to narrow banking.

If the higher risk is a net benefit, then those riskier banks should be able to pay higher returns on your deposits. Why don’t they?

Seems to sum it up nicely...

First comes concentration and consolidation, being close to the money supply provides benefits not available to others. The bail-out game repeated every 8-10 years. Then when that can no longer be done, in the face of crisis nationalization, or inflation until the currency fails bleeding off as much personal profit as possible into other assets and suppressing those assets so you get a bargain. (Ask yourself how two-party collusive options trading in the metals market might affect the spot price, could you farm it for consistent profit while ensuring the USD remains the safer alternative if you were the size of the big 5/4?)

Unfortunately, counter-party risk is inherent in just about everything these days.

You are right to consider it risky, especially when there technically is no longer a fractional reserve.

You may want to take a look at the FDIC website for monetary policy required reserves, protip its 0% a/o 2020. The only reason everything hasn't collapsed is implementing capital reserve requirements via Basel III which counts stock market capitalization as part of the reserves (based on what I read).

As for why there aren't new banks, just look at the requirements for chartering a bank. You must accept personal liability for your decisions as a Board Member and have no financial interest in the bank to be on the board of directors. You can receive no compensation, that started after 2008. Who in their right mind aside from crooks who lie or ethical religious rural/grounded/moral/actual communities (Amish/Mennonites) would find that level of exposure acceptable? The former are so common, and the latter upstanding folk so rare...

Narrow banks pass deposits into reserves. It is a good idea. It probably needs new statute to work.

It doesn’t make sense to pay the same interest on narrow-bank reserves as on risk reserves because the narrow bank, by design, must hold those reserves. The central bank doesn’t have to compete with other assets to drain that liquidity from the economy. Whether the rate paid to the narrow bank by the Fed is zero, de minimis, the repo rate or negative is a political question more than a monetary one. (Put another way: Interest on excess reserves is a crisis-era invention [1]. A narrow bank has, by definition, no excess reserves.)

[1] https://www.federalreserve.gov/monetarypolicy/reserve-balanc...